The Fall of an Ambani Scion
Dhirubhai Ambani was the perfect rags to riches story that India had ever seen. He had started out with nothing. However, he ended up becoming the richest man India has ever seen. During his meteoric rise, Dhirubhai Ambani, owner of the Reliance group of companies, beat some of the richest and most politically well-connected men in India. By this time, the Reliance brand had become synonymous with success in India.
However, after the death of Dhirubhai Ambani, he left behind two sons, both of whom parted ways. The Reliance empire was partitioned. The elder son Mukesh Ambani walked away with a net worth of more than $4.9 billion. At the same time, Anil Ambani had inherited a net-worth of $4.5 billion. This partition happened around 2006. 13 years later today, Mukesh Ambani has a net worth of close to $49 billion. This means that he has grown at a compounded annual growth rate of about 18%. On the other hand, Anils net worth has gone down to a mere $2 billion. Anil Ambani has clocked a negative growth rate during the same period.
In this article, we will have a look at the factors which led to the downfall of Anil Ambani.
Reliance Communications was the crown jewel in Anil Ambanis Reliance empire. He held a 66% stake in this company. During 2006, the telecom sector in India was booming, and Reliance Communications held a 17% market share. It was the second largest telecom company in India during that time.
However, with the passage of time, the performance of the company dwindled. Poor performance by the companys management as well as price wars within the telecom sector led to the downfall of the erstwhile telecom giant. Soon the company did not have any significant market share and was not even one of the top five service providers.
This was when the problems started. The telecom business requires a lot of upfront investments. The Reliance group had taken on a lot of debt to make these investments. However, since the revenues dried up, Reliance Communications started facing a severe cash crunch.
Attempts to Exit
Anil Ambani did realize that Reliance Communications did not have too much of a future. However, it seems like he realized it a bit too late. He made futile attempts to recoup the company until 2017. In 2017, he finally decided to sell the wireless business to Aircel. The infrastructure, i.e. the cell towers were to be sold separately to a Canadian company called Brookfield Group.
However, unfortunately, both these deals fell through. Before acquiring Reliance Communications, Aircel itself went bankrupt. Hence, the deal had to be simply called off. The failure to execute this deal also led to the fallout of the other deal.
The deal with Brookfield Group was a debt to equity swap. This meant that the Brookfield group already held a lot of debt with Reliance Communications. Instead of paying back their loans, Anil Ambani proposed that Brookfield Group take over the cell towers and in return convert their debt to equity. This would help Reliance Communications deleverage.
However, once the Aircel deal fell through, the prices of Reliance Communication shares simply tanked. This meant that Reliance now had a lot less to offer to Brookfield Investment Group. As a result, Brookfield refused to take part in any debt for equity swap.
Had Anil Ambani been quick to realize the fate of Reliance Communications, he could have sold it off much quicker and avoided the loss on his balance sheet.
By this time, creditors had started queuing up outside Reliance Communications. It was common knowledge that there were cash flow problems happening at the ADAG Reliance Group. The company also ended up defaulting on $300 million bonds. This event caused everyone in the market to take notice of the fragile situation that Reliance was in.
As a result, Anil Ambani was forced to draw up a deleveraging plan. Anil realized that the company had a lot of land in the Navi Mumbai area which could be used for commercial reasons. Hence, we drew up a plan to develop the land and sell it off. Also, he drew up another plan to sell off telecom related assets to brother Mukesh Ambanis Reliance Jio. Creditors became satisfied since these measures would be enough to pay back their loan.
However, as luck would have it, the deal with Mukesh Ambanis Reliance Jio also fell through. This is because Reliance Jio refused to pay any dues which were owed before the assets were being sold to them.
This is when the situation really worsened, and Anil Ambani was dragged to bankruptcy court.
Anil Ambani faced a lawsuit from a consortium of lenders headed by Swiss Telecom maker Ericsson. In order to defuse the situation, Anil Ambani decided to settle the matter out of court. However, even after signing the settlement, he has not been able to pay back the money owed to the creditors. This is the reason why the creditors are now asking for Anil Ambani to be put in prison if he doesnt pay them the money on time.
To sum it up, Anil Ambanis fall from grace has been sudden and unprecedented. He had gone from being one of the most powerful people in India to facing bankruptcy in a matter of 13 years.
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